Bailout Effect of Fannie Mae and Freddie Mac

Okay folks its happened, the Bush administration, acting to avert the potential for major financial turmoil says the federal government was taking control of mortgage giants Fannie Mae and Freddie Mac.  In doing so, it was also announced that both execs from these institutions were being replaced.  The replacements will be Herb Allison, a former vice chairman of Merrill Lynch, to head up Fannie and David Moffett, a former vice chairman of US Bancorp, will run Freddie.

According to a statement made by Treasury Secretary Henry Paulson, actions were being taken because Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe.  No doubt since Freddie & Fannie hold or back 50% of the mortgages in the US!

Okay so what does this really mean for us? Stabilization of the market? Higher Taxes? Bigger government?Well, during the good ole days America was enjoying house-price appreciation and in many cases, with gigantic leverage, magnifying a problem of historic proportions. Companies like Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market, The company sold ever-increasing numbers of complex and risky home loans, as quickly as possible. Countrywide was, in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers.

Whew, had to get that off my chest.  Anyway, back to Fannie & Freddie and us! Folks, while you are deciding who is your candidate for November consider this; we are now in a double-digit decline of housing that has made most homes purchased since 2005 actually worth less than their mortgages! House-price depreciation has been so relentless, particularly in Florida and California that these two states alone could bring down the whole crumbling financial economy.

Okay so what is the news for all homeowners that have a fixed-rate mortgage? Probably nothing will change, except perhaps the fact that you as a taxpayer will be footing the bill for the mistakes of borrowers who got in over their heads and the numerous greedy lenders who let them. If you are planning on buying a home, or refinancing your mortgage, then a government takeover should help stabilize rates.  Heck, they might even fall some now that the government has stepped in as backing. 

However, the only hope to break the chain of despair and turn around the declines in home values to the point where you should walk away from your home with a mortgage larger than the value of your house, is to stop this house-price depreciation fiasco. So far efforts have failed so badly in doing so that borrowers of even the highest quality are now defaulting on loans. By the way, its also becoming crystal clear that there
is no such thing as a truly safe single investment, not even blue-chip stocks like Fannie Mae or Freddie Mac that you might buy on your own, outside of a mutual fund. 

The government’s takeover of Fannie Mae and Freddie Mac can change and help shore up the market because once mortgage paper packaged by the government enterprises is truly federal government paper, then ANYTHING can be worked out with the borrowers to include rate changes, possible 45 year terms instead of 30, or anything that can be arranged to keep homeowners in the home and out of foreclosure.  Will that take an act of congress?  More than likely we won’t know until after the November elections.